Bear Mountain Capital Inc.

A Recovery?

| March 20, 2012


Are we looking at a U.S. economic recovery?  Quite possibly.  How long could this recovery last?  It depends.  What does it depend on?  It depends on the following:

* Housing
* Unemployment
* Europe
* China
* Iran

Lets start with Housing: its been a long-slog for the housing and residential construction market.  However, it looks like we are turning a corner.  In the first few months of this year a number of housing reports have come out indicating a slow, but consistent strengthening of the housing market.  Home sales are up, construction is up, building permits are up, and mortgage rates continue to be near all-time lows.  All of this points to a rising confidence that future home buying demand will begin to outweigh the burgeoning supply that has been present ever since the beginning of the housing crisis.  All things being equal, the housing market will continue to mend.  However, a negative shift in one of the other “factors” above, such as a reverse of the improving employment trend, a deepening of the current European recession or outside shocks related to China’s slowing economy or Iran’s oil exports, could have a destabilizing affect on the linchpin to a real recovery.

Now to unemployment: its improving.  Even among discouraged workers who have given up on looking for full-time work, its improving.  It seems likely that companies are unable to squeeze any more productivity out of their current work force.  This alone increases employment demand.  A slow return of the construction industry, due to a recovery in housing, could accelerate the improving unemployment picture.  Without a housing recovery, unemployment will probably improve but not at a pace that corresponds with a healthy recovery.

Europe, China and Iran:  Europe as a region, China as an economic powerhouse and Iran as major global energy supplier all affect our U.S. economic recovery.  Europe’s global demand for goods and services is weak due to the sovereign debt crisis, the austerity measures put in place because of the crisis and the recession that has subsequently resulted from these events.  This has a negative impact on our ability to sell goods and services globally.  The longer Europe struggles to climb out of its current recession and fix the structural issues that resulted in its current debt crisis, the harder it will be the for the U.S. to sustain a healthy recovery.  China’s slowing economy, could have an even stronger impact on slowing global demand.  As for Iran, this is the biggest wild card.  The threat of war with Iran, deepening sanctions on oil and the impact either could have on rising domestic energy prices would be a real threat to a continued U.S. economic recovery.

A recovery is in place, but being cautious is key.  Especially when the U.S. government has limited ability to stimulate the economy any more than it already has.  Maintaining a disciplined rebalancing strategy for our portfolios will be key to taking advantage of the potential volatility.  If the volatility does not materialize like it did last year, then we’ll see gains and we’ll take profits, while making sure our long-term risk-profile doesn’t change.

Recovery or not, we are set to ride through the current economic cycle.  Our portfolio has demonstrated resiliency through the crisis of 2008 and 2009, first by suffering declines that were less dramatic then the overall market, but more importantly recovering fully prior to the markets full recovery.  In the end, making sure the volatility we experience is suitable for each person’s risk tolerance continues to be a primary focus of our portfolio management efforts.  To this end, I think we are on track despite the economic uncertainty we face.